What Does "Reasonable" Mean When You File a Consumer Proposal or Bankruptcy in Canada?
Consumer Proposals have become an increasingly popular form of debt relief in recent times, allowing debtors to avoid filing for bankruptcy in Canada while helping creditors recover a greater percentage of the monies owed.
Even at a glance, it’s not hard to see why the process is deemed better than bankruptcy.
They have existed for many years, and the fundamentals have remained largely untouched.
As they have become a more frequent solution, though, the level of analysis given to each consumer proposal has reached new heights.
One of the hot talking points revolves around the word ‘reasonable’.
Here’s all you need to know before preparing your files, regardless of whether it’s for a consumer proposal or bankruptcy.
The Evolving Definition Of The Word ‘Reasonable’
The use of the word ‘reasonable’ within the process of submitting a consumer proposal is nothing new.
In previous eras, though, it simply confirmed that the agreement would be better for both parties than a bankruptcy.
The only real criteria was that:
- It will help the debtor pay back less money (principal sum and compound interest) while also stretching the payments over a longer period to make the monthly repayments more affordable.
- It will allow the creditor to gain a partial repayment that outweighs what they’d receive in a bankruptcy while also saving the hassle of chasing debts or writing off defaulted payments as bad debt.
Essentially, the term ‘reasonable’ equated to ‘better than bankruptcy’.
Nowadays, though, with so many more applications to consider, creditors are within their rights to scrutinize consumer proposals in far greater detail.
Consequently, they will analyze the information that is presented – with a particular focus on the budget detailing your household income and overheads.
When looking at reasonable expenses in today’s climate, creditors will focus on two main issues.
Firstly, they will want to confirm that all listed expenses are considered necessary to meet a fair standard of living.
This means that they can, and will, contest luxuries.
Secondly, they’ll want to confirm that the figure attributed to each overhead is fair.
If they suspect you have inflated the cost to reduce the monthly repayments, you can expect them to argue it.
What Are ‘Reasonable’ Expenses
Consumer proposals are legal agreements that, once accepted, cannot be overturned by the creditors.
Therefore, if they are going to scrutinize the budget you’ve submitted, they need to ensure that they do it right.
Once upon a time, most creditors were happy to look at the final figures and make a decision based on this alone without scratching beneath the surface.
Creditors now want to analyze every line of the report.
Here are the key issues they will consider:
- When looking at essential expenses, creditors will check to see that your proposals are accurate. For example, most average families can enjoy healthy nutrition for no more than $300 per month. If you are claiming $500 per month for food, creditors may contest it and suggest that cutbacks can be made.
- If you are claiming expenses for daily habits like smoking, creditors may suggest cutting down. While they won’t force you to quit, especially as it’s an addiction, they can point out the fact that you are not in a position to afford a 20-a-day habit. In truth, this is the perfect time to make the change.
- Creditors can also analyze luxuries from vacations to home upgrades. Once again, most creditors will accept that you need to enjoy a certain standard of living. Nonetheless, you cannot suddenly install a swimming pool when you’ve been allowed to forego $20,000 of debt. Expect luxuries to be scrutinized.
All consumer proposals are analyzed on a case-by-case basis, not least because there are unique circumstances to consider.
For example, your food budget may be on the large side due to food allergies or the need to manage a medical condition.
Therefore, using a trustee that will guide you through the preparations, as well as the process is vital.
Do Creditors Really Care?
Given that the consumer proposal will provide a beneficial alternative to bankruptcy from their perspective (as well as yours) you may wonder whether creditors actually care.
The short answer is: yes, they do.
The consumer proposal may provide a better outcome than bankruptcy, but it still asks creditors to write off some of the monies owed.
In fact, it’s not uncommon for the best licensed insolvency trustees to negotiate total reductions of up to 70%.
So, if a creditor is going to accept this new repayment plan, they need to see that you are making sacrifices too.
If it is shown that you are living beyond your means despite not meeting your original repayment plans, creditors will rightly be angered.
While the difference in monies owed is minimal compared to a big company’s overall turnover, it would be unfair to other clients as well as their own bottom lines.
Consumer proposals are there to help debtors that need it, not simply excuse you from debts to start living the life of Riley.
Thanks to the growing number of consumer proposal applications, creditors can no longer afford to overlook the need for ‘reasonable’ expenses either.
Why The Term ‘Reasonable’ Matters In Bankruptcy
While the term largely focuses on consumer proposals, anyone filing for bankruptcy in Canada should consider this element too.
A bankruptcy will discharge you from several unsecured debts, but you are still required to pay back:
- All secured debts.
- Student loans (under seven years old).
- Child support and alimony payments.
After being declared bankrupt, falling behind on future repayments is the last thing you need.
Therefore, presenting a detailed proposal of the reasonable monthly repayments that you can successfully meet for the duration of the agreement is crucial.
Filing Your Consumer Proposal Or Bankruptcy Claim In Style
Both bankruptcy and consumer proposals signal big financial decisions, which is why you must enter the process with full clarity.
The truth is that the legal procedures must be completed by a licensed insolvency trustee.
So, you will gain support throughout the process.
However, choosing an experienced, transparent, and meticulous trustee gives you a far better shot at getting your finances under control.
Here at BankruptcyCanada, we’ve helped over 200,000 Canadians overcome their financial problems while additionally boasting great connections with creditors on a local and national level.
To learn more about debt relief and what our experts can do for you, get in touch today.